Taxation Planning Mock Test: Practical Questions

Section 1: 38 Questions (1 Mark each):

1) (A) Share of profit which a partner receives from a firm shall be fully exempt in the
hands of the partner.
(B) Interest and remuneration which was allowed as deduction to the firm shall be taxable
in the hands of partners. .
A) (A) is correct.
B) (B) is correct.
C) Both (A) and (B) are correct.
D) Both (A) and (B) are incorrect.

2) (A) Coparcenaries are restricted to four degrees from the common ancestor.
(B) Coparcenaries are restricted to four degrees from the living holder of the HUF
property. .
A) (A) only is correct.
B) (B) only is correct.
C) Restricted to five degrees from the common ancestor.
D) Restricted to six degrees from the common ancestor.

3) As per section 89 of Indian Succession Act, a Will which is not expressive of any
definite intention becomes void for uncertainty.
A) The above statement is applicable to resident Indian only.
B) The above statement is false.
C) The above statement is correct.
D) The above statement will apply to an NRI only.

4) U/s 13A of the Income Tax Act the following Incomes of political parties is/are
included in computing their total income:
(A) Income from House property.
(B) Income from other sources.
(C) Income by way of Voluntary contribution from any person.
(D) Any Income from Capital Gains.
A) (A), (B), (C) and (D)
B) (B) and (C)
C) (A) and (B)
D) None of the above

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5) Any perquisites or allowances paid or allowed, as such, outside India by the
Government of India to a citizen of India, for rendering services outside India, are exempt
u/s 10(7) of Income Tax Act.1961.
A) The above statement will apply to an NRI only.
B) The above statement is correct.
C) The above statement is false.
D) The above exemption is applicable only to Government employees.

6) (A) Any salary surrendered by the employee to the central Government under the
voluntary Surrender of Salaries Act, 1961, will not be included while calculating his
taxable income if he is a Government employee.
(B) Any salary surrendered by the employee to the central Government under the
voluntary Surrender of Salaries Act, 1961, will not be included while calculating his
taxable income if he is a private/public sector employee.
A) (B) only is correct
B) (A) only is correct.
C) Both (A) and (B) are wrong.
D) Both (A) and (B) are correct.

7) U/s 10 of the Income Tax Act, Gratuity paid to a Government Employee or employees
of local authorities is exempt upto a limit of ______________. .
A) Rs. 350000
B) Rs. 300000
C) Rs. 250000
D) None of the above

8) (A) Receipt of an academic allowance or professional pursuits allowance by an

employee is part of zero tax.
(B) Receipt of an academic allowance or professional pursuits allowance by an employee
is part of taxable income. .
A) (A) only is correct.
B) (B) only is correct.
C) (B) is correct only for limits more than Rs. 500 p.m.
D) (B) is correct only for limits more than Rs. 750 p.m.

9) The investment limit in PO MIS, which can save tax under section 80C of the
Income Tax Act, 1961 to a resident individual is:
A Min Rs. 6000/- and no upper limit
B Min Rs. 6000/- Max 6 lakh per assessee
C Min Rs. 6000/- Max 3 lakh per assessee
D None of the above

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10) No relief under section 89 of the Income Tax Act 1961 is admissible if taxable
Gratuity is in respect of services rendered for less than ________ years.
A 15
B 5
C 9
D None of the above.

11) What is the proper order for the process of estate planning?
1. Establish priorities for estate objectives.
2. Prepare a written plan.
3. Define problem areas including liquidity, taxes etc.
4. Gather client information and establish objectives
A 3,2,1,4
B 4,1,3,2
C 4,3,1,2
D 2,1,3,4

12) Can the NRI extend his old PPF account for 5 years after its maturity?
A Yes
B No
C Yes, limited to Rs. 70,000/-
D Yes, limited to Rs. 5,00,000/-

13) X enters into a written agreement to purchase a property from Y for Rs. 25 Lakh.
He has paid the consideration and taken possession of the property. The sale deed is yet
to be registered. For the purpose of paying tax on rental income, who is liable?
A Data insufficient
B Y
C X
D Has to be both or neither

14) What is a nuncupative 'Will'?

A Oral 'Will'
B A 'Will' written but not stamped
C A 'Will' which is not signed
D A ‘Will' which is not written

15) What is a covenant?

A A restriction imposed while making an agreement
B A promise made in a deed
C The Agreement itself
D A condition to a promise which is made in the Agreement

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16) Raman, is diagnosed with a serious disease, which may render him completely
incapacitated in two years time. Raman has a son & a daughter and two grandchildren.
He has Rs. 50 lakh in net worth including his residence. Which of the following action/s
should he take?
1. Set up a durable power of attorney.
2. Immediately gift the annual exclusion amount to each child and grandchild.
3. Set up a revocable living trust.
A 1 only
B 2 only
C 1 & 3 only
D 1,2 & 3 only

17) The most important factor determining the value of a property is _________.
A Physical attributes
B Market/ marketability
C Location
D Potential cash flow

18) X is a property dealer who buys and sells housing property. He received some rent
from a housing property held as stock-in-trade in the Assessment Year 2008-09. This
rental income would come under the head:
A) Income from house property.
B) Income from other sources.
C) Business income.
D) Income under the head capital gains.

19) Vishal, an NRI, is 70 years of age. In his case, the maximum income not chargeable
to tax in India for AY 2008-09 would be ________.
A) Rs. 1,10,000
B) Rs. 1,00,000
C) Rs. 1,85,000
D) Rs. 1,95,000

20) Mukesh has taken a loan from his employer, a PSU, for pursuing his higher studies.
The amount that he pays to his employer for the loan for FY 2007-08 is Rs. 80,000. Out
of this Rs. 30,000 is towards repayment of the capital amount of the loan and the rest is
towards repayment of interest. Deduction available to Mukesh u/s 80E of IT Act would
be _________.
A) Rs. 30,000
B) Rs. 50,000
C) Rs. 80,000
D) NIL

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21) Donation to a notified temple attracts a deduction of________ u/s 80G of Income Tax
Act.
A) 50% (only if it is for renovation or repairs)
B) 100%
C) 50% (for any purpose)
D) NIL

22) As per Hindu Succession Act:

A) Cognate heirs are preferred over Agnate heirs.
B) Full blood relations are preferred over half blood relations.
C) Both of the above statements are correct.
D) None of the above statements are correct.

23) Computing "Salary" for the purpose of "Rent free accommodation includes
____________.
A) bonus
B) advance salary
C) both bonus and advance salary
D) None of the above

24) Deduction in respect of contributions to an annuity plan of certain pension funds

under Section 80C of IT Act is allowed to ___________?
A) Any Assessee
B) Individual Assessee only
C) Individual or HUF
D) Individual, resident in India

25) Which of the following statements is true in case of a Vakalatnama?

A) A Vakalatnama is required to be registered in accordance with Indian Registration
Act.
B) A Vakalatnama is not required to be registered.
C) A Vakalatnama creates a special power of agency.
D) A Vakalatnama needs to be stamped in accordance with Article 48 and 52 of the
Indian Stamp Act.

26) Unabsorbed depreciation can be carried forward for ____________.

A) 8 years
B) 4 years
C) Indefinite period
D) None of the above

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27) Vineeta, an NRI, is 63 years of age. In her case, the maximum income not chargeable
to tax in India for AY 2008-09 would be ________.
A) Rs. 1,00,000
B) Rs. 1,85,000
C) Rs. 1,10,000
D) Rs. 1,45,000.

28) If an employer has made contribution in excess of 12% of salary to an unrecognized

provident fund of an employee, then such contribution in the hands of the employee
____________.
A) in excess of 12% is treated as income
B) is treated as income in the hands of the employee
C) is not treated as income of the year in which contribution is made
D) None of the above

29) X owns a house property. It is used by him throughout the previous year 2005-06 for
his (and his family members) residence. Municipal value of the property is Rs. 166000,
whereas fair rent is Rs. 176000 and standard rent is Rs. 150000. The following expenses
are incurred by X, repairs Rs. 20000, municipal tax Rs. 16000, insurance: Rs. 2000:
interest on capital borrowed to construct the property: Rs. 136000 interest on capital
borrowed by mortgaging the property for daughter’s marriage: Rs. 20000 (in either case
capital is borrowed before April 1, 1999). Income of X from business is Rs. 710000. Find
out the net income chargeable to tax of X for the AY 2006-07.
A Rs. 642000
B Rs. 524000
C Rs. 544000
4 Rs. 680000

Solution:
Income from Business => Rs 710000
Income from House Property (Self occupied property)
Interest on capital borrowed before April 1, 1999 (max deduction allowed) Rs 30000
Net Income = 710000 – 30000 = Rs. 680000

30) For investors, while computing capital gains on sale of securities (shares and units), is
the STT paid allowed as a deduction?
A Yes
B No
C Not specified
D Can’t say

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31) Perquisites, on which tax is paid or payable by the employee, are not included as
Fringe Benefits u/s -115WB.
A This statement is true.
B This statement is false because perquisites payable to eligible employees are defined as
fringe benefit under the Finance Act.
C Can.t say.
D None of the above.

32) In an unfortunate incident, Mr. Charan’s plant catches fire and the machinery gets
destroyed. Luckily, Mr. Charan had insured the factory against fire. The WDV of the
machinery was Rs. 268000 and the replacement cost Rs. 5 lakh. The Insurance Company
has paid compensation of Rs. 3 lakh. What is the taxable amount?
A Rs. 32000 as normal income.
B Rs. 200000 as capital loss.
C Rs. 32000 as capital gains.
D Nil.

33) Your client Mr. Saxena expressed his intention to write his Will in his own
handwriting. Such a Will which is wholly in the handwriting of the testator is known as:
A Manuscript Will
B A handwritten Will is not allowed as establishing the authenticity of a handwritten
document is difficult in the court of law.
C Nuncupative Will
D Holograph Will

34) Md. Asraf, a pious Muslim calculates that his legacy would be about Rs. 21000 after
his death. He estimates his funeral cost would be around Rs. 1000 and his debt amounts
to Rs. 2000 leaving a balance of Rs. 18000. What is the maximum amount he is allowed
to bequeath?
A Rs. 6000
B Rs. 18000, being the entire amount of legacy
C NIL
4 None of the above

Solution: Md. Asraf cannot bequeath more than 1/3 of his income.
Maximum amount bequeath = 1/3 * 18000 = 6000

35) As per The Hindu Succession Act, 1956, the following person is not considered as a
Class-I heir of a person, who dies intestate:
A Mother
B Father
C Son/ Daughter
D Widow

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36) Mitesh has taken a loan from his employer, NTPC Ltd, for pursuing his higher
studies. The amount that he pays to his employer for the loan for FY 2007-08 is Rs.
90,000. Out of this Rs. 90,000, Rs. 30,000 is towards repayment of the capital amount of
the loan and the rest is towards repayment of interest. Deduction u/s 80E that is available
to Mitesh would be _________.
A) Rs. 90,000
B) Rs. 60,000
C) NIL
D) Rs. 30,000

37) Nihal, a salaried employee, receives medical allowance of Rs. 25,000 from his
employer which is fully spent by Nihal in meeting medical expenses for himself.
Determine the taxable amount of the medical allowance.
A) Rs. 10,000.
B) Rs. 25,000.
C) Nil.
D) Rs. 15,000.

38) An immovable property will be termed as a short-term capital asset if it is held by the
assessee for _______.
A) not more than 36 months
B) more than 36 months
C) exactly twelve months
D) more than 12 months

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Section 2: 19 Questions (2 Marks each):

1) Income of a resident Indian for the FY 2006-07 is Rs. 1250000 (inclusive of interest
on Government securities Rs. 15000). He invests Rs. 1 lakh in schemes and deposits
qualified for deduction under section 80C. He pays Rs. 15000 on account of mediclaim
insurance premium. Find out the tax liability for the AY 2007-08 if the taxpayer is a
senior citizen. .
A) Rs. 306350.
B) Rs. 307480.
C) Rs. 312477.
D) Rs. 278500.

Solution: Income = 1250000

80C deduction = - 100000
Mediclaim(80D) = -15000
Net income = 1135000
Tax Liability = 13000 + (1135000 – 250000) * 0.3 = 278500
Surcharge = 1.1 * 278500 = 306350
Cess(2%) = 1.02 * 306350 = 312477

2) An HUF consisted of Father, who is widower, three sons and a daughter. On death of
the father what will be the share of daughter? .
A) One fourth plus one sixteenth of HUF property.
B) One fourth of the HUF property.
C) One sixteenth of HUF property.
D) None of the above.

3) Mrs. Malini, aged 50, years has following incomes in the FY 2006-07: (A) Income
from salary + other sources Rs. 150000, (B) Income from Agricultural sources, Rs.
50000. Calculate the amount of her tax liability.
A) Rs. 1530.
B) Rs. 6630.
C) Rs. 3060.
D) Rs. 11730.
Solution: Step 1) Income from Salary = 150000
Agricultural Income = 50000
Net Income = 200000
Tax Liability = 11500
Step 2) Agricultural Income = 50000
Min Tax slab = 135000
Net Income = 185000
Tax Liability = 8500
Difference between Tax Liability (1) - Tax Liability(2) = 3000
Add Cess(2%) = 3060

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4) Gita sold her equity holding of X Ltd on 1st of July, 2006. The total sale value of
the shares was Rs. 75,000/-. The Securities Transaction Tax that Gita is liable to pay
would mandatorily be collected by _____.
A Stock Exchange
B Mutual Fund
C Income Tax Authority
D Gitas Broker

5) PQR & Associates is a partnership firm of chartered accountants, which satisfies

all the conditions of Sec. 184 and 40(b). For the FY 2006-07, the book profit of the firm
is computed to be Rs. 90,000/-. Based on this information, determine the maximum
permissible remuneration to the partners.
A Rs. 81,000/-
B Rs. 50,000/-
C Rs. 60,000/-
D Rs. 90,000/-

Solution: Profit = 90000, Max. Remuneration = 90% of 90000 or 50000 whichever is

higher = 0.9 * 90000 = 81000

6) A father purchased a residential house for Rs. 5 lakh on 6th September 1983. He
expired on 21st March 2003 and his son inherited the property. On this date, the fair
market value of the property was Rs. 20 lakh. The son sold the inherited property on
25th June, 2006 for a net consideration of Rs. 28 lakh. Determine the year from which the
son gets the benefit of indexation, if at all, for calculation of capital gains.
A 1983-84
B 2002-03
C 2003-04
D Indexation will not be applicable.

Solution: In case of inherited property the Indexation benefit begins from year of
inheritance to son.

7) A private trust is created to benefit future daughter-in-law in order to avoid the

clubbing provisions of section 64(1). In the trust, her future husband is one of the
trustees, who could be the settler / donor of such trust?
A Father-in-law
B Husband
C Both of them
D None of the above

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8) Ashok receives leave encashment of Rs. 2,00,000 on account of accumulated leave of
240 days. He has completed 24 years of service and his last 10 months average monthly
salary is Rs. 10,000. What is the taxable portion of leave encashment for Ashok if he was
entitled to 40 days leave for every year of service?
A) Rs. 1,00,000
B) Rs. 2,00,000
C) Nil.
D) Rs. 2,50,000

Solution: Leave Encashment Exempt upto Min of :

1) Leave Encashment actually received = Rs 200000
2) 10 months average salary = 10 * 10000 = Rs 100000
3) Cash equivalent of unavailed leave = 0
4) 3 lacs
Leave Encashment exempt = 0
Taxable portion of Leave encashment = Leave Encashment received – Leave Encashment
exempt = 200000

9) Pramod redeemed 5,000 units of a debt oriented Mutual Fund on 31/07/2006 @ Rs. 43
per unit. These units were purchased by him in 1994-95 @ Rs. 10. Compute the long
term Capital Gains tax. Cost of inflation index: 1994-95: 259, 1995-96: 281, 2004-05:
480, 2005-06: 497, 2006-07: 519. Ignore Education Cess.
A) Rs. 16,500
B) Rs. 22,961
C) Nil.
D) None of the above.

Solution:

Full Value of Sale Consideration(F.V.S.C) 5000 * 43 215000

Cost of Acquisition(C.O.A) 5000 * 10 50000
Indexed Cost of Acquisition 50000 * 519 / 259 100193.05
L.T.C.G (with indexation) => F.V.S.C – Indexed C.O.A 114806.95
L.T.C.G (without indexation) = > F.V.S.C – C.O.A 165000
L.T.C.G Tax = 0.1 * L.T.C.G (without indexation) 16500

10) For claiming deduction u/s 80C of IT Act, the investment in an eligible instrument
has to be out of the assessees income chargeable to tax.
A) True.
B) False.
C) Limited to Rs. 25,000
D) Limited to Rs. 50,000

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11) Amitabh wins Rs. 3 lakh in a television quiz show. He has no other income for the
particular FY. Can he contribute to PPF and claim deduction for this contribution? .
A) No
B) Yes
C) Limited to Rs 50,000
D) Limited to Rs 70,000

12) For claiming deduction u/s 80C of IT Act for AY 2008-09, the investment in an
eligible instrument has to be out of the assessees income chargeable to tax in the FY
2007-08.
A) Limited to Rs. 25,000
B) True.
C) False.
D) Limited to Rs. 50,000.

13) Vishal loans Rs. 5,00,000 to his HUF at the market rate of interest of 8%. During the
FY 2007-08, the HUF earns Rs. 75,000 as profit (before paying the interest) on the
amount advanced by Vishal. Determine the amount to be clubbed with the income of
Vishal as per Sec. 64. of the IT Act.
A) Nil.
B) Rs. 75,000.
C) Rs. 35,000.
D) Rs. 40,000.

14) Paresh owns a let out house property the net annual value of which is Rs. 200000.
The standard deduction under Sec. 24 that is available to Paresh in respect of the above
income would work out to _______.
A Rs. 20000
B Nil
C Rs. 40000
D Rs. 60000

15) Within two years of purchase of his flat, Vaibhav entered into an agreement to sell
the same to Mihir for Rs. 8 lakh. Vaibhav had bought the flat for Rs. 5.5 lakh. Mihir pays
Vaibhav earnest money of Rs. 50000 in respect of the transaction with the balance money
payable within a month. However, for some unavoidable reason, Mihir could not make
the rest of the payment and in terms of the agreement between the two; the earnest money
paid was forfeited by Vaibhav. Subsequently, within a month Vaibhav sold the flat to
another buyer for Rs. 9 lakh. Compute Vaibhavs taxable income under capital gains. 2
A Short-term capital gains of Rs. 4.5 lakh
B Short-term capital gains of Rs. 4 lakh
C Short-term capital gains of Rs. 5 lakh
D Long-term capital gains of Rs. 4 lakh

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16) In an unfortunate incident, Mr. Charans plant catches fire and the machinery gets
destroyed. Luckily, Mr. Charan had insured the factory against fire. The WDV of the
machinery was Rs. 2.68 lakh and the replacement cost Rs. 5 lakh. The Insurance
Company has paid compensation of Rs. 3 lakh. What is the taxable amount?
A Rs. 32000 as normal income.
B Rs. 32000 as capital gains.
C Rs. 2 lakh as capital loss.
D Nil.

17) B Ltd. purchases raw material on credit from A, who holds 20 percent equity share
capital in B Ltd. (the amount of bill being Rs. 36000, market price being Rs. 19000). It is
paid in cash on Jul 26, 2006. As per section 40A (2) & 40A (3), how will it be treated?
A Out of the payment of Rs. 36000, Rs. 17000 (being the excess payment to a person
holding a substantial interest) shall be allowed under section 40A (2). The remaining
amount (i.e., Rs. 19000) does not exceed Rs. 20000. Nothing shall be disallowed under
section 40A (3) even if the payment is made in cash.
B Out of the payment of Rs. 36000, Rs. 17000 (being the excess payment to a person
holding a substantial interest) shall be disallowed under section 40A(3). The remaining
amount (i.e., Rs. 19000) does not exceed Rs. 20000. Nothing shall be disallowed under
section 40A(2) even if the payment is made in cash.
C Out of the payment of Rs. 36000, Rs. 17000 (being the excess payment to a person
holding a substantial interest) shall be disallowed under section 40A(2). The
remaining amount (i.e., Rs. 19000) does not exceed Rs. 20000. Nothing shall be
disallowed under section 40A(3) even if the payment is made in cash.
D Out of the payment of Rs. 36000, Rs. 17000 (being the excess payment to a person
holding a substantial interest) shall be allowed under section 40A(3). The remaining
amount (i.e. Rs. 19000) does not exceed Rs. 20000. Nothing shall be disallowed under
section 40A(2) even if the payment is made in cash.

18) Vinod invests Rs. 1,50,000 in shares of XYZ ltd on 1st December 2005 and receives
a dividend of Rs. 25,000 on 31st March 2006, the record date. The investment is sold on
2nd June 2006 in NSE for Rs. 1,20,000. How much short term loss, if any, arising out of
this investment is allowable for set-off in FY 2006-07?
A) Rs. 25,000.
B) Rs. 5,000, since provisions of Sec. 94(7) will apply.
C) Nil.
D) Rs. 30,000.

Solution: Since the investment is sold after 3 months of purchase 94(7) will not apply and
S.T.C.G = 150000 – 120000 = - 30000 will be allowable for set-off.

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19) A public charitable trust registered under section 12A of the Income Tax Act, derived
gross income of Rs. 16 lakh for the financial year ending 31/03/2007, which consists of
the following:
(A) Income from properties held by trust: Rs. 5 lakh.
(B) Income (net) from business (incidental to main objects): Rs. 4 lakh.
(C) Voluntary contributions from public: Rs. 7 lakh.
The trust applied a sum of Rs. 11.60 lakh towards charitable purposes during the year
which includes Rs. 3.60 lakhs towards repayment of loan taken for construction of an
orphan home. Determine the taxable income of 9 the trust for the assessment year 2007-
08.
A) Rs. 16,00,000.
B) Rs. 2,00,000.
C) Nil.
D) Rs. 4,40,000.

Solution: For a public trust registered under section 12A of the Income Tax Act, 85% of
income must be applied for charitable purposes.
Gross Income = 1600000
85% to be applied to charitable purposes = 1360000
Income actually applied for charitable purposes = 1160000
Taxable income = 1360000 – 1160000 = 200000

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Section 3: 14 Questions (4 Marks each):

1) Manju purchased an annuity for Rs. 26000 in the current year. Under the contract,
Manju will receive Rs. 300 each month for the rest of her life. According to actuarial
estimates, Manju will live to receive 100 payments and will receive a 3% return on her
investment. Which one of the following statements is true?
A) If Manju collects Rs. 3000 in the current year, the Rs. 3000 is treated as a recovery of
capital and thus is not taxable.
B) If Manju lives to collect more than 100 payments, all amounts received after the
100th payment must be included in her gross income.
C) If Manju dies after collecting a total of 50 payments, she has an economic loss that is
not deductible.
D) If Manju lives to collect more than 100 payments, she must amend her prior years
returns to increase her taxable portion of each payment received in the past.

2) Mr. Pashupati receives following salary and perquisites for the previous year 2006-07.
Find the perquisite value of rent free furnished house.
Basic salary = Rs. 15000 pm, Dearness allowance = Rs. 6000 pm which is fully used for
calculating retirement benefits, Bonus Rs. 15000, Entertainment allowance being paid
since last 15 years = Rs. 6000 per annum, Transport allowance @ Rs. 800 pm. Rent free
furnished house in Delhi for which employer has paid a rent of Rs. 5000 pm. Cost of
furniture provided to Mr. Pashupati is Rs. 60000. .
A) Rs. 54600.
B) Rs. 66000.
C) Rs. 60600.
D) Rs. 60000.

Solution: Salary = 12* (15000 + 6000) = 252000 + Bonus + Entertainment Allowance

(Note Transport Allowance is exempt upto Rs 800 per month)
Salary = 273000
i) 20 % of Salary = 54600
ii) Lease rental paid by employer = 5000 * 12 = 60000
Minimum of i) and ii) = 54600
Furniture cost = 60000
Value of perquisite = 54600 + 10% * Furniture Cost = 60600

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3) On 15th September, 2001, Manisha purchases 500 shares of ABC Ltd. a listed
company @Rs. 50 per share. Under a scheme of buy back of its own shares, on 15th
June, 2006, ABC Ltd. buys back the shares from Manisha at a price of Rs. 75 per share.
Calculate the capital gains tax payable by Manisha, if any. Assume Cost Inflation Indices
are 2000-01: 406, 2001-02: 426 and 2006-07: 519.
A) Rs. 1367.
B) Rs. 1250.
C) Nil.
D) Rs. 1408.

Solution:
Full Value of Sale Consideration(F.V.S.C) 500 * 75 37500
Cost of Acquisition(C.O.A) 500 * 50 25000
Indexed Cost of Acquisition 25000 * 519 / 426 30457.74
L.T.C.G (with indexation) => F.V.S.C – Indexed C.O.A 7042.25
L.T.C.G (without indexation) = > F.V.S.C – C.O.A 12500
L.T.C.G Tax = 0.1 * L.T.C.G (without indexation) 1250

4) X purchased a bungalow at Lonawala near Mumbai on Jan 1, 2006 for Rs. 8 lakh and
immediately thereafter on Jan 2, 2006 leased the same to a public limited company for a
period of 99 years on annual lease of Rs. 2 per annum. The terms of the lease provide that
the lessee shall keep a interest free deposit of Rs. 22 lakh with the lessor during the
period of lease. Further, after 25 years, the lessee shall have an option to cancel the lease
agreement in which case the sum of Rs. 22 lakh shall be refunded immediately? What is
the income under Capital Gains of X for FY 2006-07, if there is no other transaction?
A) Rs. 1400000.
B) Nil as X has not sold the Bungalow but has leased it out.
C) The income of X will be Income from House Property of Rs 2 only.
D) The income of X will be Income from House Property of Rs 2 only + Notional interest
on Rs. 22 lakh@
10% p.a.

Solution: Lease is considered a capital transfer so Capital Gains is applicable

Full Value of Sale Consideration (F.V.S.C) 2200000
Cost of Acquisition (C.O.A) 800000
S.T.C.G => F.V.S.C – C.O.A 1400000

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5) On May 10, 2006, X purchases 1000 equity shares of Rs. 10 each in A Ltd. @ Rs.
55.55. On October 20, 2006, he transfers 800 equity shares @ Rs. 37 per share and
remaining 200 shares are transferred on December 20, 2006 @ Rs. 20 per share. A Ltd.
Declares 50 percent dividend (record date: August 3, 2006). During the previous year
2006-07, he has generated long term capital gain of Rs. 76,000 on sale of gold. His
LTCG For AY 2007-08 is ____________.
A Rs.73,890/-
B Rs. 59,050/-
C Rs. 58,050/-
D Rs. 72,890/-

Solution:
F.V.S.C (800 shares) 800 * 37 29600
F.V.S.C (200 shares) 200 * 20 4000
L.T.C.G (gold) 76000
Dividend Cost 1000 * 5 5000
Total F.V.S.C 114600
Cost of Acquisition(C.O.A) 1000 * 55.55 55550
L.T.C.G => Total F.V.S.C – C.O.A = 59050

6) Prasad sells shares in XYZ Ltd. for a net consideration of Rs. 20 lakh and earns a
long-term capital gain of Rs. 15 lakh. Within 3 months, he purchases a new residential
house for Rs. 10 lakh. He owns no other house other than the new house. The amount of
exemption under sec. 54F that he would be entitled to would be _______.
A Rs. 7.5 lakh
B Rs. 10 lakh
C Rs. 5 lakh
D None of the above

Solution:
L.T.C.G 1500000
Price of new House 1000000
Amount of exemption = L.T.C.G * (Amount Invested / Sale Net Consideration)
Amount of exemption = 750000

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7) Kailash, working in the private sector, earns a Basic Salary of Rs. 24,000/- per month.
He also gets a dearness allowance of Rs. 2,000/- per month, 60% of which forms part of
salary for retirement benefits. His employer for which the employer pays a rent of has
provided him with a rent freeaccommodation in Chennai Rs. 5,000/- per month to the
landlord. Calculate the perquisite value of the rent free accommodation for the FY 2006-
07.
A Rs. 31,200/-
B Rs. 59,520/-
C Rs. 60,000/-
D Rs. 60,480/-

Solution: Salary = 12* (24000 + 0.6 * 2000) = 302400

a) 20 % of Salary = 60480
b) Lease rental paid by employer = 5000 * 12 = 60000
Perquisite Value of Rent free accommodation: Minimum of a) and b) = 60000

8) Mrs. Shanti, aged 40 years, is a small retail trader. She has a net business income of
Rs. 2,00,000 during the FY: 2006-07 and stays in a self occupied house acquired on 25
Jan 1999. She pays Rs. 35,000 as interest on a housing loan. She also pays Rs. 5,000
towards Prime Ministers. National Relief Fund and Rs. 5,000 towards National Children's
Fund during the year. She also deposits Rs. 15,000 in PPF during the year. Find her tax
liability for FY: 2006-07.
A) Rs. 510.
B) Nil.
C) Rs. 1,275.
D) None of the above.

Solution: Business Income = 200000

80C deduction = - 15000
Int. Housing loan = - 30000
Donation(80G) = -5000 (P.M. National Relief Fund 100%)
Donation(80G) = -2500 (P.M. National Childrens Fund 50%)
Net income = 147500
Tax Liability = 0.1 * (147500 – 135000) = 1250
Cess(2%) = 1.02 * 1250 = 1275

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9) Sudhakar (34 years) gifts Rs. 10 Lakh to his wife Mrs. Sudhakar (29 years). She
deposits the same in a bank (on 1st Apr 2006) @ 8 percent per annum. Suraj is a minor
child of Sudhakar and Mrs. Sudhakar. Suraj has a bank deposit of Rs. 70,000 (rate of
interest 8.25 percent p.a) as on 1st Apr 2006, which was gifted to him by his grandfather.
Other income of Sudhakar and Mrs. Sudhakar is as follows - Sudhakar: Rs. 2,90,000
(salary: Rs. 2,00,000, bank interest: Rs. 90,000), Mrs. Sudhakar: Rs. 1,60,000 (interest on
company deposits). Out of the interest, Mrs. Sudhakar deposits Rs. 1,000 in Public
Provident Fund. Sudhakar's contribution to the recognized provident fund is Rs. 40,000.
Calculate tax liability of Mr & Mrs. Sudhakar for AY 2007-08.

A) Tax Liability of Mr. Sudhakar is Rs. 51,290 & Mrs. Sudhakar is Rs. 3,366.
B) Tax Liability of Mr. Sudhakar is Rs. 50,284 & Mrs. Sudhakar is Rs. 3,300.
C) Tax Liability of Mr. Sudhakar is Rs. 50,734 & Mrs. Sudhakar is Rs. 3,366.
D) Tax Liability of Mr. Sudhakar is Rs. 51,749 & Mrs. Sudhakar is Rs. 3,366.

Solution:
Head of Income Mr. X Mrs X
Income from Salary 200000
Interest on Bank Deposit 90000
Bank interest from gift to wife 80000
Interest on Gift to child 5775
Interest on Company Deposit 160000
Gross Income 375775 160000
80C Deduction - 40000 -1000
Minor child exemption -1500
Net Income 334275 1500000
Tax Liability(AY 07-08) 51288.15 3366
Tax Liability(AY 08-09) 50760.975 2369

10) Madhuri sells shares in PQR Ltd on 14th June, 2006 (off market), for a net
consideration of Rs. 20,00,000 and earns a long-term capital gain of Rs. 15,00,000.
Within 3 months, she purchases a new residential house for Rs. 10,00,000. She owns no
other house other than the new house. Now if Madhuri were to sell the new house within
one year of purchase for Rs. 15,00,000, the tax treatment in the year of sale would be __.
A) Short-term capital gain of Rs. 5,00,000 and Long-term capital gain of Rs. 10,00,000
B) Short-term capital gain of Rs. 5,00,000 and Long-term capital gain of Rs.
7,50,000
C) Short-term capital gain of Rs. 7,50,000 and Long-term capital gain of Rs. 5,00,000
D) Long-term capital gain of Rs. 12,50,000

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Solution:
L.T.C.G (from shares PQR) 1500000
Cost of Purchase of new house 1000000
Sale of new house 1500000
S.T.C.G 500000
L.T.C.G L.T.C.G * (Amount Invested / Net Sale)
L.T.C.G 1500000 * (1000000 / 2000000) = 750000

11) Dr. Ashok and Dr. Pramod are partners in a clinic which is assessed as a Firm. Both
contribute Rs. 3,00,000 each and are sharing profit and loss equally. They are expecting a
net profit (before considering interest and remuneration to partners), as Rs. 6,00,000 for
the previous year 2007-08. If the interest is allowed @ 10% pa, calculate the tax liability
of the Firm.
A) Rs. 91,390.
B) Rs. 85,500.
C) Rs. 86,330.
D) None of the above.

Solution:
Firms As Such Net Profit = 600000, Individual Contribution = 300000
Interest on Capital = 10% * 300000 = 30,000
Net Income = Net Profit - Interest on Capital to each partner = 600000 – 2 * 30000
Net Income = 540000
Maximum Remuneration = 90% * 100000 + 60% * 100000 + 40% * (540000 – 200000)
Maximum Remuneration = 286000
Tax Income of Firm = Net Profit – Interest on Capital – Maximum Remuneration
Taxable Income of Firm = 254000
Tax Liability = 30% * 254000 + 10% Surcharge + 3% Education Cess = 86334

12) X Ltd. engaged in the business of manufacturing software furnishes the following
data.
1 - Gifts to employees Rs. 10.25 lakh
2 - Rent-free accommodation given to employees Rs. 45 lakh
3 - Expenses on participation in Trade Fair Rs. 8.75 lakh
4 - Expenses on health and sports club for employees Rs. 5 lakh
Note: Exclude surcharge and education cess for all calculations.
Fringe Benefit Tax payable for 1, 2, 3 & 4 to employees are: 4
A Nil, Rs. 13.5 lakh, Rs.13125 & Nil respectively
B Rs. 307500, Rs. 6.75 lakh, Rs. 131250 & Rs. 150000 respectively
C Rs. 61500, Rs. 270000, Rs. 52500 & Rs. 30000 respectively
D Rs. 153750, Nil, Nil & Rs. 75000 respectively

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Solution:
1) Gift to employee FBT = 30% of 50% of 1025000 = 153750
2) Rent free Accomodation FBT: Nil because perquisite is applicable
3) Expense on Trade Fair FBT: Nil
4) Health, Sports Club FBT: 30% of 50% of 500000 = 75000

13) Sanjay, a resident of Nagpur, receives Rs. 78,000 as basic salary during FY 2006-07.
He stays with his parents up to August 31, 2006 (for which he does not pay any rent) and
thereafter in an accommodation taken on monthly rent of Rs. 3,000. His employer pays
Rs. 700 per month as house rent allowance throughout the previous year. Determine the
taxable portion of House Rent Allowance for Sanjay.
A) Rs. 4,900.
B) Nil.
C) Rs. 8,400.
D) Rs. 3,500.

Solution:
Case 1: Apr06-Aug06
a)Actual HRA: 700*5 3500
b)40% of Salary: 0.4*78000*7/12 13000
c)Excess rent over 10% of salary: (No rent paid) 0
HRA exempt Minimum of a,b,c = 0
Taxable portion(1) = Actual HRA received - HRA exempt = 3500

Case 2: Sept06-Mar07
a)Actual HRA: 700*7 4900
b)40% of Salary: 0.4*78000*7/12 18200
c)Excess rent over 10% of salary: 3000*7 – 10%*78000*7/12 16450
HRA exempt Minimum of a,b,c = 4900
Taxable portion(2) = Actual HRA received - HRA exempt = 0
Taxable portion = Taxable portion(1) + Taxable portion(2) = 3500 + 0 = 3500

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14) Mahesh is employed in a company on a basic salary of Rs. 20,000 pm and is allowed
a dearness allowance of 30% of which 50% is included in salary for retirement benefits.
His company pays him HRA of Rs. 5,000 pm. Compute his exemption on HRA for FY
2006-07. Mahesh is staying in Meerut and pays a house rent of Rs. 5,000 pm.
A) Rs. 35,160.
B) Rs. 24,840.
C) Rs. 32,400.
D) Rs. 60,000.

Solution: Salary = 20000 + 0.5 * 0.3 * 20000 = 23000

a)Actual HRA => 5000 * 12 = 60000
b)40% of Salary => 0.4 * 23000 * 12 = 110400
c)Excess rent over 10% of salary => 5000 * 12 – 10%* 23000 * 12 = 32400
HRA exempt Minimum of a,b,c = 32400

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